1041, Schedule E, and K-1

[OakTree13]

I am the successor trustee for my deceased mother's grantor real estate trust.  I am also the sole beneficiary.  I know that after she passed, the trust became irrevocable.  The house in the trust is rented.  I have read all the instructions for 1041 and K-1.  I do not understand the "relationship" between the 1041 and the required to-be-attached Schedule E (1040) and the K-1 concerning the deductions/expenses.  The expenses that the trust had for 2023 include real estate taxes, attorney fees, home-owners insurance, and depreciation.  Where do these deductions go (1041 or Schedule E)?  I read the changes in the IRS code (section 67(e) and I am even more confused.  If anyone can shed some light on this it would be very much appreciated.  

[tagteam]

The trust may have become irrevocable on the date of your mother's passing but the trust could still be a grantor trust if you're the sole trustee, sole beneficiary, and have authority to transfer the assets (or some of them, at least, or certain other powers granted to you) into your own name, personally (i.e., you're the "owner of the assets").

You should most likely consult with a local tax professional or legal counsel who can review the terms of the trust. If the trust is a grantor trust as to you, then you can likely dispense with filing a 1041 and report the income, expense, et al, on your own individual income tax return.

[OakTree13]

Thank you for your reply.

I asked my legal counsel about it and he told me that the trust was a nominee (realty/real estate) trust (as it was in Massachusetts).  The nominee trust is now a irrevocable grantor trust. Also, after my mother passed away, my attorney said that I needed an EIN for the trust.  So I immediately did that.  There was no rental income in the 2 months following my mother's death up to the end of the year (my decision).  I completed and mailed an initial 1041 for the trust from my mother's Date of Death to the end of the year (2022).

I will assume that you are not an attorney, but that you have much knowledge in trusts.  So....  Just to verify everything, the declaration of trust states:  "This Trust shall be known as the XXXXX Real Estate Trust and is intended to be a nominee trust, so-called, for federal and state income tax purposes and to hole the record legal title to the Trust Estate and such functions as are necessarily incidental thereto."  Further on, under "Beneficiaries",  it states:  "The parties hereunder recognize that if a sole Trustee and a sole Beneficiary are one and the same person, legal and equitable title hereunder shall merge as a matter of law."  What does that mean? 

Also under "Power of Trustees", it states:  "The Trustees shall hold the principal of this Trust and receive the income therefrom for the benefit of the Beneficiaries, and shall pay over the principal and income pursuant to the direction of all the Beneficiaries..."  Does that infer that the Trust must use 1041?  

Also, under "Resignation and Successor Trustee" it states that if my mother passes, I am the successor trustee and the documentation of that was recorded in the Registry of Deeds, and it also states:  "Upon the recording of such instrument, the legal title to the Trust Estate shall, without the necessity of any conveyance, be vested in said succeeding or additional Trustee or Trustees, with all the rights, powers, authority and privileges as if named as an original Trustee hereunder."  Does this infer that the trust does not need a 1041?

Sorry this is so long.  I hope you can shed more light on this for me.

[tagteam]

When legal and equitable title merge, that typically indicates one party (or more than one) own the property outright without trust as the "umbrella". In other words, a trust splits ownership (usually) between the trustee, who has legal title (ownership) , and the beneficiary(ies), who have equitable title/ownership. That is inherent in the nature of a trust.

Whether or not a 1041 is required to be filed would be dependent upon whether the trust is considered to be a grantor trust (one in which the grantor owns, or has certain powers over, the assets held in the trust).

If that is the case when your mother passes, then the trust would become a grantor trust and you would likely own the property outright.

Beyond the foregoing, although I am a lawyer, you should seek counsel in your jurisdiction from someone who can review all of the terms of the trust but, hopefully, you have a better understanding of how a trust would work in regard.